Budgeting could be easier with the expert called 50-20-30 approach. 50% goes to fixed costs, 20% to savings and investment goals and 30% to fund budget. But is this approach good or bad?
This is a great approach for those who don't know how to begin budgeting or are too clueless on how to control their spending and save a bit of money. Lets all admit that this is almost 90% of the people around us, budgeting is a very common conundrum. If you are in the situation, you have probably tried tracking your budget to the envelops system or an excel worksheet, use quicken or an app. Its not about all of these things but either forget to begin or fail to sustain them. Simplify the process by using the 50-20-30 approach. Limit your spending for three categories:
- 50% of total-take home pay should be put in for essential cost, this should include mortgage, school service for children or parking garage fees at work.
- 20% should be put in financial goals such as college education fund, retirement or health fund.
- 30% is for the lifestyle expenses such as clothes and other lifestyle activities
By creating only a three categories, this approach break the mental barrier for most people averse to tracking their finances. That is the biggest benefit for this budget approach. But, remember that the success in this strategy does not depend on tracking after spending the amount. Its success hinges on creating a limit and then sticking within that limit.
This budgeting requires a bit of thinking and having a clear idea what your essential spending categories are and a list of financial goals that you want to achieve.
Weakness:
The weakness of this budgeting approach lies on a simplified simplicity. Even if a person is earning more than the average amount every month. How easy is it to keep essential spending below 50%?
For most people half of that will probably go to mortgage, food and considering which category should include monthly savings for annual expenses like tuition, travel or car maintenance.
Lastly, is 20% too much or too little for financial goal? Some might find that a 10% amount is better for beginners, some may find to reach their financial goals they may have to push to 30% or even higher.
The 50-20-30 approach is a good soundbyte but if followed strictly then it might lead you astray.
If somebody earns P30,000 a month, Using this approach, only P15,000 (50%) should be allotted of rent, transportation, food and electricity. Set aside P6,000 (20%) for financial goals and then P9,000 (30 %) for lifestyle expenses. In both low income groups and high income brackets, this budget approach is not going to work.
"To make budgeting work, you have to create your own and adapt it to your own situation."
Salve Duplito.
In saving money, it would not matter to start saving at least P50 per day and increase it to P100 per day in 6 months or 1 year. The amount at this point is not as important as to creating a habit since it is difficult to save money. To connect this to budgeting, skimming from the top would be very helpful by setting aside saving immediately after receiving the salary and make do with what remains without having to borrow. But, lets keep in mind not to get stuck into that level,that is by increasing it little by little by taking 10% of total take home pay or even higher. To make this savings habit easy to do, focus on setting aside savings and investment funds first then make do with the rest without having to borrow. In some months, essential expenses may go higher than 50% of total monthly earnings and some months it is lower than 50%. But it will not matter if you treat savings and investments like a monthly electricity bill, whats important is the savings and investment goals.
Other people say that 20% savings and investment monthly is doable. This is by keeping our spending simple and by motivating ourselves and not think about retirement rather for future spending like travel, cruises and and happiness at 60 years of age and that could give some motivation.
When a person hit 30s, around 40% of income should be set aside already for investment. By 40s, affords a 40% and go up higher than 40% but then again this is a very general rule.
Like any financial rule of tongue, this 50-20-30 strategy can lead you astray, it may be a good starting point but remember to use it only if it fits your own financial goal.
Acknowledgment:
Content Credit: ANC/Salve Duplito
Image Credit: savingissexy.info
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